Inflation to Remain Above Target Until Mid-2025

Economic

Summary:

Annual CPI Inflation in November rose to 2.6 per cent from 2.3 per cent in October.

Annual CPI Inflation in November rose to 2.6 per cent from 2.3 per cent in October. The new inflation in the month from October to November 2024 was 0.1 per cent, which combined with the inflation dropping out from the same month of 2023 (0.2 per cent) led to the increase in the headline inflation rate of 0.3 percentage points. The November figure was very much in line with our medium scenario which predicted 2.7 per cent.

Services inflation has remained high at 5.0 per cent. However, goods price inflation has increased to 0.4 per cent, switching from a negative value of -0.3 per cent. This is the first positive value for goods price inflation for over 6 months. Core inflation (CPI excluding food and energy) has also risen for the second month running to 3.5 per cent. The latest ONS data on wages (August to October 2024) shows year-on-year increases of 5.2 per cent, up from 4.8 per cent. There is also some optimism to be taken from the NIESR trimmed mean inflation measure (an alternative measure of core inflation) which has increased slightly to 1.5 per cent. Taken together, these figures indicate that inflationary pressures are still with us: given the additional geopolitical uncertainties, we believe that the Bank of England should hold off further interest rate cuts until inflation is moving back down again to target in 2025. Slow but steady wins the day.

This biggest contributors to the changes in headline inflation between October and November were:

Transport 0.13 percentage points

Recreation and Culture 0.08 percentage points

Clothing and Footwear 0.06 percentage points

Alcohol and Tobacco 0.06 percentage points

Restaurants and Hotels -0.04 percentage points

We can look in more detail at the contributions of the different sectors to overall inflation in Figure 1 below, with the old inflation dropping-out of the annual figure (October-November 2023) shown in blue and the new monthly inflation dropping in (October-November 2024) shown in brown. The overall effect is the sum of the two and is shown as the burgundy line. Overall, if we focus on the brown new inflation, there were seven positive contributions with three positives (and zeros for two). The fact that there was positive “new” inflation across most sectors indicates that inflationary pressures have not gone away.

Overall, the drop ins contributed 0.1 to the increase in inflation, which is quite modest (if maintained over 12 months this would lead to annual inflation of just 1 per cent). The blue drop outs were positive in seven sectors, dominated by transport (again) and negative in three. Overall, the drop outs contributed 0.2 percentage points to the increase in inflation.

Inflation to Remain Above Target Until Mid-2025_1

Looking forward to October 2025

We can look ahead over the next 12 months to see how inflation might evolve as the recent inflation “drops out” as we move forward month by month. Each month, the new inflation enters the annual figure and the old inflation from the same month in the previous year “drops out”. Previously we ended the “low inflation” scenario but have reintroduced it in response to some recent months with near zero month-on-month inflation. We depict the following scenarios for future inflation dropping in:

The “low” scenario assumes inflation each month is equivalent to 1 per cent per annum (0.08 per cent per calendar month).The “medium” scenario assumes that the new inflation each month is equivalent to what would give us 2 per cent per annum or 0.17 per cent per calendar month – which is both the Bank of England’s target and the long-run average for the last 25 years.The “high” scenario assumes that the new inflation each month is equivalent to 3 per cent per annum (0.25 per cent per calendar month).The “very high” scenario assumes that the new inflation each month is equivalent to 5 per cent per annum (0.4 per cent per calendar month). This reflects the inflationary experience of the United Kingdom in 1988-1992 (when mean monthly inflation was 0.45 per cent).

Previously we have followed the “very high” or “high” scenarios. We think that now inflation is likely to come in the “high to medium” range and that the “very high” is less likely (geopolitics notwithstanding – see below). The November figure of 2.6 per cent is as predicted by the low scenario, reflecting the month-on-month figure of 0.1 per cent. If we follow the medium to high scenario, this gives us 2.4 per cent in December (there is a negative contribution from the rise in inflation in December 2023). However, if month-on-month inflation comes in with low or medium figures, the range will be slightly lower at 2.3-2.4 in December.

Note that as we move into 2025, the forecast becomes dominated by the scenario we are following (each scenario comes to rest at its assumed annual rate). The January “bump” will depend on the extent of January sales: if the sales are of a similar magnitude to January 2024, there will be no “bump”. In the forecasts depicted, it is assumed that there is no January sales effect, resulting in the bump upwards as the January 2024 sales drop out. However, because the bump is driven by the drop out, it does not affect the forecast inflation for Feb-May 2025. However, the low, medium and high scenarios all predict falling inflation from February to May 2025. The forecasts then diverge to their underlying scenarios (low at 1 per cent, medium 2 per cent to very high at 5 per cent).

The UK and EU have also intensified sanctions on Russian oil exports (namely the ships involved in the exports). This might lead to a reduction in the world oil supplies that might increase oil prices, particularly if the US follows suit. The US is hard to call, because even if the Biden administration brings in sanctions, the incoming Trump administration may well not implement them. This would increase inflationary pressures in the UK (and the EU and US).

In the Middle East there is a high likelihood of conflict breaking out between Iran and Israel in the coming months, which may well draw in allies of the two countries – including the United States and Russia. Direct involvement of the United Kingdom and EU countries is also possible. The effects of this will be highly significant for inflation as we move forward. The straits of Hormuz would be closed off, restricting oil and liquid natural gas (LNG) supplies to the United Kingdom, Europe and the rest of the world. This will cause an immediate spike in oil and LNG prices and will almost certainly cause a significant increase in energy prices of a similar magnitude to what we saw in 2022. If the war happens, as many expect, then the very-high inflation scenario becomes the most likely trajectory with inflation rising to levels of 4 per cent and above depending on how the war plays out. However, hopefully cooler heads will prevail and allies on both sides will caution restraint as they have a lot to lose if the conflict escalates. Inflation to Remain Above Target Until Mid-2025_2

Inflation to Remain Above Target Until Mid-2025_2

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Brookings Institution

Economic

Tere, a young woman living in an urban neighborhood in western Mexico, dreams of a better future. She completed her secondary education, surpassing her mother and partner’s education, but without child support or affordable childcare, she cannot work or study. Her aspirations are overshadowed by poverty, partner violence, and unpaid care and domestic work. A public food assistance program provides her a basic income, easing the strain of her partner’s irregular income. Yet, despite programs supporting women’s entrepreneurship and job training, Tere remains trapped in a cycle of dependency.

Tere’s story reflects the reality of more than 15 million women in Mexico who face intersecting challenges and remain trapped in systemic inequalities, unable to leverage the tools and promise that formal education has offered for better economic prospects. Over the past two decades, Mexico, a middle-income country, has developed a robust legal and institutional framework for gender equality. Today, gender parity in basic education has been achieved, and women’s enrollment in graduate and postgraduate programs now surpasses men’s. However, the 31% gap between men and women in access to paid work highlights persistent barriers to women’s economic autonomy.

Women’s economic autonomy: A multidimensional construct

Women’s economic autonomy (WEA), defined as a woman’s ability to generate income and have control over financial resources, based on equal access to paid work, is a multidimensional construct that requires a comprehensive policy approach from the State. A mapping of public programs in Mexico revealed 89 public programs at the federal, state, and municipal levels that address at least one aspect of economic autonomy, yet few of these provide a holistic approach that combines multiple components to address intersectional inequalities.

Existing single-component programs fail to address the intersecting barriers that marginalized women like Tere face, leaving many behind. Research highlights the need for tailored, multifaceted interventions to effectively break cycles of poverty and inequality. Additionally, territorial and administrative fragmentation in programs exacerbates challenges for marginalized women, with WEA programs being delivered by multiple agencies across government levels with limited coordination, imposing high transaction costs. Women like Tere must navigate bureaucratic hurdles, transportation costs, and time investments, further limiting their access to economic autonomy opportunities.

The current WEA policy landscape in Mexico reinforces entrenched economic and social inequalities, trapping marginalized women in cycles of poverty, gender-based violence, and unpaid care and domestic work. Addressing these policy limitations is essential to creating inclusive, integrated, and transformative pathways to economic autonomy for all women in Mexico.

Shifting mindsets for transformative policy change

To address these challenges and advance marginalized women’s economic autonomy in Mexico, it is crucial to understand and shift the mental models that will allow systems transformation to tackle inequality, rather than perpetuate it. Particularly uncovering policymakers’ mindsets, their habits of thought, deeply held beliefs, and assumptions about gender equality and WEA and how that influences their relationships, policy responses and practices (Figure 1).

Over the past four months as an Echidna Global Scholar at the Center for Universal Education, I have researched the mindsets of policymakers in economic, education, social, and gender policy in the state of Jalisco, Mexico. Through in-depth interviews with over 20 policymakers, I examined the policymaking process—and the mental models that inform it—to identify ways to better align WEA programs with the needs of marginalized women. My research focused in particular on second-chance education programs, which hold potential to improve marginalized women’s economic autonomy by providing holistic training and mentoring services, along with support networks.

The research showed how policymakers’ mental models relate to WEA policies in four different ways: how they understand the nature of the problem and the solution, and the way they frame women’s role and their own in relation to policy. These mindsets are represented as a Mindset Map (Figure 2) to illustrate the complexity of decision making and the multiple narratives that shape policymakers’ approaches to WEA. The Mindset Map can be used as a tool for navigating the continuum of beliefs and assumptions that policymakers hold with respect to WEA and gender equality in general.

Policymaker mindsets are crucial in shaping WEA policies and the experiences of marginalized women accessing these programs. For example, in relation to the mental model around women’s role in WEA, if a policymaker views women as “receivers” their preferred policy response may focus on providing cash transfers or food aid, addressing only women’s immediate needs but failing to promote economic autonomy. Alternatively, viewing women as “agents” might lead to training programs that tap into their potential, such as building skills. When policymakers position themselves at the extremes of the continuum, they might neglect women like Tere, who face childcare responsibilities with no access to any type of support, and experience gender-based violence, and poverty. To be more effective, WEA policies must recognize the need to both strengthen skills and confront the structural and cultural barriers impeding their progress.

Mindsets can change

The research highlighted that policymakers’ life experiences shape their mental models, which can evolve over time. Some policymakers interviewed shared how personal experiences such as motherhood, social service, travel, training, or experiencing violence and discrimination changed their perspectives. Many also acknowledged that interacting with women facing gender inequalities deeply impacted their understanding. However, most policymakers reported having limited contact with women living in marginalization, such as Tere. This disconnect affects how they perceive the challenges women face, particularly in the context of WEA programs, and can limit the development of more comprehensive policies suitable to address the intersectional barriers women like Tere face.

A key step in expanding the economic autonomy of marginalized women in Mexico is strengthening local ecosystems that address poverty, gender-based violence, and unpaid care work. This requires a collective commitment, particularly from policymakers in the gender, education, and social development sectors, to rethink WEA policy with a shared vision centered on marginalized women. Two key actions are needed: first, implementing holistic, multisectoral programs that align social development, education, and gender programs at the local level, leveraging community infrastructure; and second, strengthening civic participation policies to amplify the voices of women like Tere. Direct engagement with women, including those who have not participated in or have dropped out of WEA, will provide valuable insights to improve policy responses and interventions. By prioritizing marginalized women, we can increase their autonomy and create positive ripple effects for their families and communities, promoting shared prosperity across Mexico.

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UBS

Economic

Anticipated backdrop of greater deregulation

The US elections dominated market conversations in November as the Republican party won decisively, with Donald Trump becoming only the second Republican to win the popular vote since 1988. In the subsequent weeks, we have seen the President-elect begin to nominate candidates for various cabinet positions, which has created plenty of sector-level volatility, particularly in areas relating to trade and healthcare. Still, the notion of US exceptionalism in financial markets has continued gaining traction, strengthening the US dollar and driving flows out of both developed and emerging markets and into the US.

Merger Arbitrage outlook

One of the significant changes we anticipate on the back of this change in government will be the outlook for mergers and acquisitions (M&A), and we have increased exposure to our Merger Arbitrage book over the past few months on positive signposts for the space. The most obvious policy change with the greatest potential impact to M&A would be in antitrust enforcement. We expect that both Jonathan Kanter (Assistant Attorney General/Antitrust, Department of Justice) and Lina Khan (Chair of the Federal Trade Commission, FTC) will step down around the inauguration, and we anticipate that the new administration will replace both roles with candidates who may be more aligned with the “consumer welfare standard” that has guided US antitrust regulation for the past 40 plus years. No potential candidates have been mentioned for these seats yet, and we will be interested to see the degree of antitrust experience that the new nominees have compared to their political ambitions.

Anticipated policy changes

From a policy perspective, we are looking for a number of changes that could ease the recent hurdles faced by parties in antitrust review, particularly in vertical transactions. Under new leadership, we anticipate that the agencies will conduct fewer investigations into “novel” theories of harm, which often lead to Phase II requests, and which have drawn deal timelines out considerably over the past few years. We would also expect fewer suits to block transactions (particularly on novel grounds), and instead see greater reliance on structural or behavioral remedies and consent decrees, which the current FTC has stepped away from. Each of these changes would help in truncating deal timelines, which have extended considerably over the past two years. More importantly, we would be playing on a better-defined field with more transparent rules, which could embolden companies in moving forward with new transactions. Greater certainty around regulatory approval should be additive to today’s environment of stable to falling rates, robust markets and strong fundamentals for companies looking to acquire growth or break into new markets.

As the perceived regulatory risk in the market declines, we could also see average deal spreads compress. Since Q3 2021, average spreads have been consistently higher than pre-pandemic levels, as per UBS Investment Bank, which we believe was due largely to the more opaque process and lengthy timelines of antitrust reviews. It remains to be seen how long it will take for the current risk premium in the market to narrow, and we believe that there will be some degree of “show me” from market participants wary of the incoming president’s reputation for unpredictable decisions. Installing experienced leadership at both the FTC and DOJ will certainly help the merger arbitrage community regain confidence in the regulatory process and may allow us to be more aggressive in upgrading deals in our risk management system and managing larger position sizes under our deal grading scheme.

Portfolio update

As mentioned last month, we had de-risked exposure coming into the US elections and are happy with the way the fund navigated that binary event. In the back half of November, we faced a few headwinds as the “Trump bump” faded and we experienced weakness in our Asia Broad, China Long/Short and Emerging Market Long/Short books. Our Event Driven strategies also lost ground despite spreads narrowing somewhat on election enthusiasm, as a few deals with regulatory deadlines widened on concern that the outgoing antitrust administration might attempt to block transactions on their way out. The Energy Transition Long/Short space added to performance on strength in industrials and fossil fuel-related names, and the European Long/Short book rallied thanks to a strong performance from retail and macro sleeves.

While we remain in a period of information discovery when it comes to the new US government and trade policy, we think sector winners and losers are emerging. We have identified a number of new higher conviction short-term opportunities and so have increased both gross and net exposure. More broadly, the election results have reduced uncertainty for corporates, and we believe that the anticipated backdrop of greater deregulation should lead to more active capital markets, which should be a positive flywheel effect for our investment teams.

To stay updated on all economic events of today, please check out our Economic calendar

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BNP PARIBAS

Economic

Bond

Building climate resilience is crucial to make sustainable finance decision and in the face of escalating climate change impacts. A new taxonomy measuring climate resilience could unlock up to USD 3 trillion in investments by 2030, guiding sustainable finance decisions and helping to bridge the USD 194-366 billion climate finance gap.

The growing need for climate resilience

The effects of climate change are already keenly felt across Asia. The growing number of extreme weather events – such as typhoons and heavy rainfall that leads to flooding – can result in the loss of life, damaged infrastructure, and impeded economic growth.

In 2023, the United Nations said that Asia was “the world’s most disaster-effected region… due to weather, climate and water-related hazards”. And with serious typhoons like Yagi ripping across the region, as well as severe flooding in southern China, 2024 is shaping up to be another year of intense climate activity.

The bad news is that climate change looks likely to worsen as temperatures rise. The World Meteorological Organisation forecasts an 80% likelihood that global temperatures will exceed 1.5°C above industrial levels, sometime between 2024 and 2028. This not only highlights a need to strengthen commitments to reduce carbon emissions, but also for societies to build resilience, by adapting to further climate shocks.

The concept of resilience is especially important, particularly in relation to making investment decisions, so that capital can be best allocated to the places where adaptation is most needed. The need for investment is enormous, with the UN Environmental Programme estimating the adaption finance gap to be USD 194 billion to USD 366 billion, which is equivalent to 10 to 18 times current flows.

Measuring climate resilience: the Climate Bonds Resilience Taxonomy

This is why the Climate Bond Initiative has created the Climate Bonds Resilience Taxonomy (CBRT) – a framework to guide investment into climate resilience that measures an issuer’s ability to withstand and adapt to climate change impacts.

Key components of the Climate Bonds Resilience Taxonomy

The CBRT is designed to identify and categorise investments that strengthen climate resilience, thus helping investors to prioritise high-impact projects across the seven areas that the taxonomy covers. These include the physical, social, economic and natural aspects of resilience.

Both the users and use cases of the CBRT are diverse. It is a practical tool that can be used by governments, financial institutions, companies, and market observers. It will guide debt issuance, shape fiscal incentives, while at the same time informing corporate risk management and investment strategies.

In terms of methodology, it draws on the expertise of a wide range of stakeholders, integrating the latest scientific research and methodologies to address changing needs and enabling investments that foster resilience. Its three main criteria are:

significant contributions made to resilience,the effective management of maladaptation risks,the alignment with broader sustainability goals.

The benefits of a standardised climate resilience taxonomy

The benefits of an effective taxonomy to measure resilience are widespread. The CBRT provides guidance to issuers so that they can identify and invest in resilience projects that have a significant impact. And by using a standardised methodology, these investments can be easily aligned with broader national and international climate goals, easing the flow of both public and private sector funding.

Unlocking new investment opportunities

The new taxonomy could unlock as much as USD 3 trillion in new investment for climate resilience by 2030, according to the CBI. Much of this funding would be directed towards Asia, given the region’s unique vulnerabilities to climate change in the face of rapid urbanisation.

Going forward, the CBRT will evolve as it is implemented in Asia. The CBI expects that it will adapt the taxonomy for local contexts, making sure that its criteria fit the local context, while at the same time maintaining compatibility with the global framework.

Furthermore, market engagement will help create a coalition for resilience investment, bringing together governments, financial institutions, investors, and issuers. A key part of this engagement will be clear guidance on how to apply the CBRT.

As climate change becomes a greater concern among the global investment community, the CBRT will likely become an important part of the financial toolkit used by financial professionals to make investment decisions related to sustainability.

Market outlook and future directions

BNP Paribas Markets 360 is forecasting USD 630 billion of green bond issuance in 2024, a record, with Asia Pacific expected to account for around USD 150 billion of this year’s total. This would be a slight step down from last year’s record, but still a large share of the overall market.

The Bank sees a record wall of maturities coming over the next three years, so is forecasting rising issuance for green bonds in 2025 and 2026, with USD 700 billion and then USD 850 billion respectively. In particular, maturities from Chinese banks over the next two years will be elevated, so BNP Paribas’ Markets 360 team expects strong issuance from banks to replenish this maturing green credit.

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JanusHenderson

Economic

On Wednesday, the Federal Reserve (Fed) provided additional proof points to what the market had been pricing since September: The U.S. economic cycle is extending, and while that is likely to benefit riskier assets, the landscape for many pockets of the fixed income market is becoming less certain.

Starting with the Fed’s dovish pivot exactly a year ago – and only briefly interrupted by a bout of sticky inflation in early 2024 – expectations were for an aggressive easing cycle. The upper bound of the federal funds target rate – 5.50% at the time – was well above the U.S. central bank’s favored inflation measure, signaling highly restrictive policy.

The Fed’s 25 basis-point (bps) rate cut was not much of a gift, as it was accompanied by a less friendly policy outlook. A resilient U.S. economy, along with the pricing in of pro-growth policies by the incoming Trump administration, has flipped the “accommodation” script. The cut to 4.5% this week had been widely expected by the market. Also expected were modest upward revisions to the central bank’s Summary of Economic Projections. The degree to which many of these expectations were adjusted, however, may have been our biggest takeaway from this meeting.

In monitoring these statements, it’s important to identify potential incongruities between general rhetoric and the details. While Fed Chairman Jay Powell spoke to both sides of the central bank’s dual mandate being “roughly in balance,” we believe the bias has again shifted toward managing inflation risk.

By the numbers

In the Fed’s updated projections, the revision to real economic growth as measured by gross domestic product (GDP) confirmed what most already knew: At a 2.5% clip in 2024, the U.S. remains in the class of advanced economies.

Sturdy U.S. growth was reflected through a modest bump in 2025 and 2026 GDP expectations and a slightly lower unemployment rate for 2024 and 2025. Chairman Powell was quick to reiterate that a resilient labor market was a welcome development and that he did not expect wages to be an upward force on inflation.

The most notable revisions were in higher inflation projections. For 2025 and 2026, headline inflation as measured by the Personal Consumption Expenditures Price Index was upwardly revised to 2.5% and 2.1%, respectively. Core inflation for those two years is now expected to clock in at 2.5% and 2.2%, respectively. By this measure, the Fed only expects to hit its inflation target of 2.0% in 2027.

Here we would highlight the core services component of inflation. We believe the Fed may be concerned that this key input to overall price stability may be bottoming well before inflation has reached its target. By this rationale, maintaining a dovish stance could extinguish recent progress on inflation.

Behind the “dots”

Also of note were revisions to the Fed’s expectations for its policy path. Much of the previous dovish trajectory had already been taken off the table. That trend continued, with this iteration of the survey now projecting only two cuts in 2025 (down from four) and an additional two in 2026, in line with earlier estimates. Importantly, the terminal rate for this cycle is expected to be 3.0%. Only a year ago, the call was for 2.5%.

What’s behind the expectations for the shallower rate path is important. If driven by anticipation of higher economic growth due to a business-friendly agenda, that’s positive for markets. If, however, the more inflationary components of the incoming U.S. administration’s agenda – e.g., tariffs – necessitate higher policy rates, investors would rightly be concerned about volatility along mid-to longer-dated points of the U.S. yield curve.

Markets in motion

The range of potential outcomes for bond markets has widened. A cycle extension in the U.S. comes with the risk that progress on inflation could stall, injecting volatility into mid- to longer-dated bonds. Uncertainty about the incoming administration’s policy priorities further clouds the picture. Thus far, the U.S. economy has nailed the elusive soft landing. Firming economic growth could keep the party going – or it could reset consumers’ inflation expectations to a higher range, forcing a rethink of underlying assumptions by the Fed.

Typically, investors would welcome a return of a term premium in the U.S. Treasuries curve. But that incremental bump in yields between the 2-year and 10-year notes – currently about 15 bps – is a reflection of rising uncertainty around U.S. inflation and the appropriate policy response. Investors must decide if that incremental yield is worth the risk.

Valuations matter, too. A cycle extension should benefit quality corporate issuers. But the yields on many of these securities relative to their risk-free benchmarks are narrow by historical standards, leaving little cushion to protect against rate volatility. While defaults are low and a growing economy should help corporations maintain coverage ratios, we believe securitized credits represent a better opportunity at present given more attractive valuations and the potential for their underlying assets to appreciate.

The Fed’s updated projections affirm that, globally, economic growth and policy responses are diverging. Upwardly revised rate expectations mean that the U.S. remains an attractive destination for yield. Conversely, weakness in Europe and other jurisdictions is likely to result in additional policy easing and lower rates. Furthermore, several pockets of the global credit market currently trade at discounts to similarly rated U.S. peers.

Conclusion

The era of synchronized bond markets and meager yields is over. This presents an opportunity for investors to fortify broader portfolios with bonds’ ability to generate income, act as a diversifier, and reduce volatility.

To accomplish this, however, investors must be nimble and seek to identify the segments that represent the most attractive trade-offs. Unlike in years past, all levers matter, including region, credit rating, and duration exposure. Astute investors have the opportunity to lean into these disparities to strike a balance between defensiveness and capturing excess returns

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SAXO

Economic

In this year’s final episode of the Saxo Market call, John J. Hardy, chief macro strategist, and Ole S. Hansen, head of commodity strategy, discussed what’s in store for 2025 – a year that’s already shaping up to become interesting. As Hardy concluded: “Stay flexible. Don’t assume you have the answers. The big questions are what matter most, and 2025 will bring plenty of them”.

Here are five overall themes, they discussed.

1. Markets at a pivot point

Hardy flagged increasing market divergence as a key concern: “AI and tech stocks are booming, while broader indices like the Dow and S&P 500 are showing caution. When sectors diverge like this, it’s often a sign that volatility is building,” he said, noting that investors should be aware of sharp shifts as markets enter 2025 on uneven ground.

2. Politics will dominate

Hardy sees Trump’s return as a game-changer for global trade: “Tariffs aimed at bringing manufacturing back to the US could trigger inflation,” he said and noted that Trump’s focus on reducing inflation presents a contradiction that may disrupt markets at the same time.For Europe, Hansen highlighted Germany’s critical need to adapt: “They’ve lost cheap Russian energy and are facing pressure from China in key industries like autos. They must invest to rebuild its economic model. The potential is there—political will is the question.” he explained.China remains a wildcard: “They’re trying to export their way out of domestic troubles, but that will clash with Trump’s trade policies.” Hardy said.

3. Commodities in focus

Hansen sees commodities as a potential bright spot in 2025, driven by inflation fears and supply constraints: “Tangible assets like gold are attractive when inflation and debt loom large,” he said.Electrification will continue to drive metals demand, especially for copper and aluminium: “As AI and tech require more power, the need for these metals will grow,” Hansen noted. He also flagged food markets as vulnerable: “Volatile weather is a major risk. Look at cocoa and coffee this year—this theme isn’t going away.”

4. Inflation and growth concerns

Hardy highlighted contradictions in US fiscal policy: “Trump wants growth, tax cuts, and deficit reduction—but something’s got to give,” he said. Tariffs and labour restrictions could also drive inflation: “If immigration is curbed, labour costs could soar, adding more pressure,” he said.

5. Opportunities amid uncertainty

Despite the risks, Hardy remains optimistic: “We’re entering a new era. Old economic models are breaking, but that creates opportunities. It’s going to be fascinating to see how countries adapt,” he said.Hansen added that Germany and Europe have the potential to turn things around if they embrace change: “The resources are there—it’s about political will.”

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JPMorgan

Economic

The alternative investment landscape often evolves gradually. Assets may be priced infrequently and therefore are less sensitive to day-to-day market moves. Time horizons are inherently lengthy. While this makes them great portfolio diversifiers, it doesn’t make them immune to broader backdrop shifts that could influence assets over the lifespan of an investment. One massive change afoot is the new administration and the potential policy changes that it may bring. These policy changes could, in turn, impact monetary policy as well, resulting in a high-for-longer rate environment.

There are myriad policy changes that could potentially occur, and many may not come to fruition at all, but below we highlight a few policy-linked opportunities and risks from our 4Q Guide to Alternatives:

Tax cuts boost exits and capex – The combination of a corporate tax cut, deregulation, and reduced political uncertainty could rouse a drowsy exit market in private equity, reigniting IPO and M&A activity. Tax cuts could also support earnings and revenue of private equity target companies . A corporate tax cut aimed at domestic production could spur more industrial activity, increasing the demand for infrastructure.

Public to private infrastructure – Mounting debt and deficits could limit further infrastructure investment from the government, increasing demand for private infrastructure projects.

Deregulation rebalances lending – Regulation has made lending costly and more stringent for traditional lenders, tilting market share toward non-bank lenders. Deregulation could reduce some of that regulatory burden, supporting bank lending. However, less regulation for banks would also likely mean less regulation for private credit, alleviating a future pain point.

Tariffs transform transport – Aggressive tariff proposals could reshape global trade. However, transport assets could benefit from longer shipping routes as supply chains reorder. However, a protracted trade war could lower global trade volumes, as we saw in 2019, which could be a long-term headwind.

Hedge funds navigate uptick in volatility – FX and interest rate volatility could persist if confronted with tariffs and policies perceived to be inflationary. This could benefit macro hedge fund performance, which has historically tracked volatility.

Early end to easing – Many proposed policies could be pro-growth, but also inflationary. If this is the case, the Fed could end its easing cycle early, leaving the federal funds rate at a higher terminal rate. This may keep financing more expensive and challenge commercial real estate mortgages or private credit loans that were amended or extended in anticipation of a more favorable rate environment.

It is too early to speculate on exactly what government policies may change and how that may alter the Fed’s calculus, but investors ought to be mindful of potential impacts to alternative assets. Still, regardless of how the policy landscape shifts, investors will continue to seek alpha, income, and diversification, which alternatives can provide.